Goal of the reform
Since the creation of the European Single Market in 1993 transitional VAT rules have been in place for cross-border supplies of goods. According to the European Commission, the transitional rules need to be changed. The goal of the single VAT area is to reach agreement on four fundamental principles:
- Tackling fraud: VAT of destination country to be charged on cross-border trade.
- One Stop Shop (OSS): VAT return filing only in home country.
- Greater consistency: VAT taxation in destination country.
- Less red tape: simplification VAT compliance and VAT invoicing rules.
In the single European VAT area, the ‘destination principle’ will prevail meaning that by default, goods will be taxed in the Member State of arrival of the goods. A ‘one stop shop’ is proposed to manage the compliance burden. A business that sells goods cross-border can file VAT returns and pay VAT due in the Member State of destination through a digital portal in its own Member State. In combination with a simplification of VAT invoicing rules, this would reduce red tape. The single European VAT area should significantly reduce VAT fraud (by up to 80%).
Transitional measures and “quick fixes”
The single European VAT area is not part of the current proposal for transitional measures and quick fixes. The current proposal is limited to:
- the introduction of a Certified Taxable Person (CTP): reliable taxpayers that can benefit from the quick fixes mentioned below. CTP is comparable to Authorized Economic Operator (AEO) status for customs purposes; and,
- transitional measures and quick fixes to improve the VAT system at short notice.
Call off stock simplifications are proposed to achieve a single intra-EU supply instead of two supplies, insofar as the transaction is taking place between CTPs. This would prevent the need for a separate VAT registration in the Member State where the call off stock is located. Chain transaction simplifications are proposed for supplies in a chain that do not lead to the physical movement of goods insofar as the parties in the chain are CTPs. Furthermore, it is proposed to amend the conditions to apply an exemption for cross-border supplies. The acquirer of the goods has to be identified for VAT purposes, and correct filing of a VIES listing will also become a substantive condition.
The proposal for transitional measures and quick fixes will be forwarded to the European Parliament for consultation and to the Council of Ministers for agreement. Unanimous agreement from all Member States in the Council is required before the proposal can enter into force. In order to allow a soft transition for tax administrations and businesses, this change will be made by means of a gradual two-step approach. A proposal for a single European VAT area is expected in 2018.
The overhaul of the European VAT system is part of the so-called VAT Action plan and is introduced in parallel with other proposals such as the e-commerce digital economy proposal, which is currently winding its way through the Council. The e-commerce digital economy proposal focuses on clear deliverables and started out with political backing from the conclusions of OECD BEPS Action One. The proposals therefore appear to be separated for pragmatic reasons.
Notwithstanding the upbeat presentation we expect that timing will be very challenging, especially as the Member States will have to agree on collecting and remitting VAT via a one stop shop. This will result in difficult negotiations that could take several years and compromises are likely. The proposals for transitional measures and quick fixes provide an outlook of what to expect in the coming years. Compromises to these proposals will likely influence more significant elements that will be pushed further down the line. We expect that the negotiating agenda will only have real political power behind it when Germany takes presidency of the Council in July 2020.
Interesting topics, such as real-time VAT collection, split payment or the use of blockchain technology, are currently not part of the proposals, which could be viewed as a missed opportunity to really modernize the VAT system.